Institutional investors can create added value with crowdlending

Raphael Haldner

Crowdlending, which is also known as marketplace lending, has now arrived in the institutional investment sector, too. The returns that can be achieved with this alternative form of investment are often significantly higher than those of traditional investments. Risks can be effectively reduced by means of broad diversification and price development has hardly any correlation with the safe custody account assets, which can usually be found on a list of assets.

The right platform

Although the crowdlending platforms may seem similar at first glance, the way they function can differ greatly. Whereas some providers increase risk diversification with additional features, such as a joint and several liability clause between the investors, other platforms offer isolated participation in individual receivables. It is important to get an idea of the platform operator’s key figures at the start of the selection process. This includes not only the financial figures of the operator itself, but also the key figures on loans paid out to date, rejection rates, average loan amounts and historic default rates. Since many providers have only entered the market in the recent past and do not have a long company history, it is also essential to talk to the management in person.

Crowdlending via structured, regulated products

A matter of interest for future investors is how the sourcing process works on both sides – in other words, how the lender and borrower find their way to the platform and ultimately ensure market liquidity. Product manufacturers and future investors want to be sure not only that there will be a sufficient volume of applications available for investment but also that they will have the option of prematurely terminating a current loan receivable.

For the crowdlending platforms, the route to institutional investors such as pension funds, insurance companies and family offices is almost exclusively via structured and regulated investment products.

Not all A ratings are equal

A key point to check is the scoring. Every borrower is given a risk classification which ultimately determines the overall risk and the target return within a product. Product manufacturers and future investors must ensure that they understand the risks of the individual rating classes by carefully studying the scoring methodology. This is all the more important because every platform uses its own scoring models, meaning that they are only comparable to a limited extent.

Earnings forecasts through geographic focus

A factor which has a big influence on crowdlending’s attractiveness as an asset class is the geographic zones in which the platform awards the financing. Measurable payment habits in both the private and SME sectors can vary considerably from one country to the next. With that in mind, it is definitely important to choose an operator that has a specific geographic focus so as to be able to make earnings forecasts that are as accurate as possible.

Monitoring and rating the product

When it comes to the continuous monitoring and rating of the product, the manufacturer has to rely on the ongoing supply of data via the credit portfolio. Payment delays and even defaults can have a major impact on the return from a product and must be identified in good time. Accordingly, the platform must be technically capable of providing both standardised reports and reports that are tailored to the product manufacturers’ specific needs.

A win-win situation

In addition to returns, another argument that product manufacturers can offer vis-à-vis investors is convenience. All payment flows, such as interest payments and repayments, are automatically executed via their bank account, key investor notifications are communicated via their principal bank and the product is shown, as usual, as a depositable security in the client portfolio. If product manufacturers take care to choose the right platform and understand the essential processes involved in crowdlending, they can create added value both for themselves and for their customers.

Bank Frick Raphael Haldner
Raphael Haldner
As Head of Fund and Capital Markets, Raphael Haldner is responsible for all fund services for professional market participants.